GST: A good policy undermined by regional politics

India’s taxation system is not as transparent as those of the developed economies. It is estimated that GST (the goods and services tax in the pipeline and expected to be implemented by the new government) can add up to 2 per cent to the overall GDP growth rate of India. The GST is likely to bring about a qualitative change in the current tax system by redistributing the burden of taxation equitably between manufacturing and services. A study by NCAER (National Council of Applied Economic Research) predicts the impact of GST on growth through direct cost reduction as well as cost reduction of capital inputs. The study implicates a growth in GDP to be between 2-2.5% with the implementation of a well-planned GST. It anticipates an increase in exports between 10-14%. The GST then calls for a boost in action to usher this system as soon as possible.

The anticipated Goods and Services Tax (GST) is a classic case study of lack in political will and collaboration. It is holding back an initiative on contribution for a much needed economic boost in the country. GST is India’s ambitious indirect tax reform plan and it has all the right intentions and aims at bringing together a common market by dismantling fiscal barriers between states. The idea is to have a single national uniform tax levied across the country on all goods and services.

The implementation of GST faces political hurdles as States fear loss of discretionary fiscal power and revenue losses upon implemention. They want some assurance on protection of revenue loss as a result of the implementation of GST. The new government will have to quickly implement economic reforms to jumpstart a slowing economy and GST can be a important factor in pushing those reforms. What will be needed is State and Central Government initiative to reach a uniform rate (number) that works by safeguarding and balancing each’s interests. Also, a single rate system is bound to result in low compliance costs, prevent classification disputes, and result in a uniform approach for all players which is likely to work in national interest. But again, a single rate cannot be too high or too low. The rate must be high enough to meet the worries of the States on revenue neutrality. Quick decision making and speedier implementation are vital to turn things around and IT connectivity is a prerequisite for right implementation of GST.

Making the taxation system transparent and predictable will not only boost investor’s confidence but also invite new trade prospects nationally and internationally. India not only needs fast implementation of the GST but also reforms on broadening the tax (direct) base. Once the how’s of implementation are reached with bipartisan consensus and upon dwelling on bigger objective like improving India’s economic growth, it will put GST in perspective as it is expected to essentially remove trade barriers.

Your thoughts are welcome.

Sanjay Puri has been working on Indian-American issues and facilitating stronger US-India relations through USINPAC (US India Political Action Committee and AUSIB (Alliance for US India Business), two bipartisan organizations that he chairs.

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